UK businesses have been given unprecedented protection from enforcement action by creditors since the start of the pandemic in March 2020, but from the beginning of October those vital ring fences have mainly been dismantled. It is now open season for frustrated unpaid creditors, wielding winding up petitions in pursuit of their money.
New legislation has created a partial relaxation of the ban on issuing winding up petitions from 1st October 2021 until 31st March 2022, when all restrictions will finally end.
What are the new rules for issuing winding up petitions?
Small companies, or at least those companies owing small amounts are still safe. A creditor must be owed a minimum of £10,000 to issue a petition. Landlords remain out in the cold, unable to present a petition for unpaid commercial rent of any amount until the end of March 2022.
The creditor must issue a written notice of the debt to the debtor and asked for payment proposals. The debtor then has 21 days from the date of the notice to make a payment proposal ‘satisfactory to the creditor’. The notice from the creditor must refer to the 21 day proposal period, or else the notice could be deemed to be invalid.
Who decides whether a proposal is ‘satisfactory’?
The legislation for these new arrangements appears to leave it up to the creditor to decide what it thinks is satisfactory and there is no requirement for the creditor to negotiate with the debtor. The new law does require the creditor to state in the subsequent winding up petition why it considers the proposals unsatisfactory.
Unfortunately, the law is silent on whether the debtor and the court are expected to take this explanation at face value or whether the court will apply some level of scrutiny before making a winding up order against the debtor. This uncertainty will surely soon be tested in court, but in the meanwhile it will remain a serious concern for struggling debtors.
What are the implications for creditors?
Pending clarification of the uncertainty over what constitutes a satisfactory payment proposal and who decides on this key point, creditors should assume that it will be unwise to either arbitrarily or irrationally reject a fair and reasonable proposal. This is especially so where the proposal offers them a better recovery than would be likely if the debtor went through a formal insolvency process and this is demonstrated clearly in the proposals from the debtor.
What should debtors put into their payment proposal?
The flip side of the concern for creditors is of course that the debtor must explain in their proposals the rationale for the payment offer they make, in particular aspects such as their cash resources, cash flow prospects, competing creditor pressures and their future trading prospects, as well as what actions they are taking to improve their financial position. The alternative outcome in the event that the creditor presses ahead with presenting a petition and the debtor is wound up must be spelled out. All of these issues are likely to be taken into consideration by the court if it chooses to exercise scrutiny over the process.
How will lenders react to this new regime?
Most commercial lending agreements include a requirement for the borrower to inform the lender if it receives a winding up petition and gives the lender the right to freeze bank accounts once a petition has been issued. The new 21 day proposal period introduces a new ‘limbo’ period, so that banks will no doubt seek to introduce an additional requirement to be notified when a borrower receives the creditor’s written notice of a debt and its call for payment proposals. It remains to be seen what action lenders will take under these circumstances.
Independent advice on a proposal
Both creditors and debtors are likely to be best served by getting independent advice on aspects of this new system, crucially on the vexed issue of whether a proposal is satisfactory or not. For debtors, putting together their proposal will involve a review of their financial situation and prospects, which for many will be beyond their resources and experience and which may prove a major distraction for a hard-pressed management team running a struggling business.
How can we help?
If you are already affected by these issues or worry that you might be, Opus is here to help. Our ethos is to engage with those facing difficulties with a constructive and positive attitude. Contact us at your nearest local office to arrange a no obligation and confidential call with one of our Partners.